Network effect
A network effect is when a product becomes more valuable to each user as more people use it. It is one way a company builds a moat, because a rival cannot copy it by improving its product. It has to move an entire crowd at once.
How it works
A messaging app with better features is worth nothing to you if the people you actually message have not moved there with you. The value comes from who is already there. A rival cannot copy that by building a better feature. It has to move a whole crowd together, which is far harder.
A moat built on gravity
A network effect works through gravity: it pulls users toward wherever the crowd already is. It answers the one question every moat answers: could a rival copy this, and would customers actually leave? Here the answer is that leaving means giving up the crowd.
Compared with legal protection
Legal protection, such as a patent, a licence or a regulatory approval, works through a wall: it simply forbids entry, even if a rival's product is as good. A network effect works without any law, through the crowd.
Neither is forever
Neither guarantees safety. A patent expires and a licence can be given to someone else. A network can be replaced if enough of the crowd moves for a strong enough reason. A moat is a reason to look more closely, not a reason to stop checking. Maetis does not give investment advice.
A messaging app (hypothetical)
Picture an imaginary messaging app used by a family, a housing society and a bill group. Habit is moderate, the cost of switching is low because chats export easily, and its costs are no lower than any rival's. Its real protection is that everyone you need to reach is already there, not any brand or law. That crowd is the moat.
Common questions
- What is a network effect in simple words?
- A product becomes more valuable to each user because more people use it.
- Why is a network effect a moat?
- A rival cannot copy it by building a better product. It has to move a whole crowd, which is much harder.
- Is a network effect permanent?
- No. A network can be replaced if enough people move for a strong enough reason.
- How is it different from legal protection?
- A network effect works through the crowd. Legal protection, like a patent, works through the law and forbids entry.